Macroeconomic Theory custom essay.

 1. William Easterly in his book ‘The Elusive Quest for Growth’ described the  Solow’s growth theory as a ‘shocker’. Discuss why the Solow’s growth model was surprising. Which policy implication of the Solow model was surprising and how did Solow arrive at this policy implication?

  1. Using the Solow growth model, discuss the likely impact of the following changes on the level of Canadian output per worker in the long run (that is steady state):
  • The government of Canada has introduced a Tax Free Saving Account legislation that allows Canadians to open up a savings account that is sheltered from income tax.
  • Canadian female participation (but constant population) is expected to continuously increase in the coming years.


  1. Suppose that the production function of a country is given by

Y=AKaL1-a, where A is the techonology parameter, L is labour, and K is capital.


  • Show that the production function exhibts constant returns to scale.
  • Are there decreasing returns to capital? (hint: MPK= aAKa-1L1-a)
  • Derive the equation for steady state output per worker and steady state consumption per worker in terms of the saving rate (s), the technology parameter (A), and depreciation rate (d).
  • Suppose that d = 0.05, a = 0.5, and A = 1. With your favourite spreadsheet software, compute steady state output per worker and consumption per worker for s = 0.1, 0.2, …1.
  • Based on (d) above graph the steady state consumption per worker and output perworker against saving (saving on the horizontal axis). Is there a saving rate that maximizes steady state consumption per worker?

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